The Corporate Tax Poison

With high unemployment a major topic in the upcoming election, you would think raising taxes on job creators is the last thing President Obama wants to do. And yet, his budget proposal includes an enormous increase in corporate taxes, to the tune of $350 billion per year. Some of that comes from ending tax breaks for fuel, which of course will have a ripple effect throughout the economy, as the cost of fuel is built into most consumer prices. On top of that, Obama wants tax increases on personal income, which would also hit most small business profits.

Well, at least we get our little “payroll tax cut,” paid for by a raid on Social Security funding. You might have noticed it hasn’t done much for job creation. In fact, a new study from the Tax Foundation, using data from 34 different countries, says “the evidence is quite conclusive” that Obama’s strategy for job creation has things exactly backward, because “there is no significant relationship between payroll taxes and long-term economic growth. In contrast, corporate income taxes have a highly significant and negative effect on long-term growth.”

The estimates suggest that cutting the corporate rate by 10 percentage points is associated with an increase in total real GDP growth of 11.1 percentage points over the period. This would move the U.S. from below average to above average in terms of economic growth among OECD countries. Personal income taxes on high incomes also have a significant negative effect on growth, such that cutting the rate by 10 percentage points is associated with an increase in total real GDP growth of 7.5 percentage points over the period. This would bring the U.S. to roughly an average level of growth relative to OECD peers.

The U.S. will soon have the highest corporate income tax rate among OECD countries and it already has the most progressive income tax systems of any industrialized nation. Thus, the evidence strongly suggests that the key to boosting long-term economic growth in the U.S. is to cut tax rates on corporate and individual income.

The negative effect on economic growth becomes more pronounced as corporate tax rates climb… and the United States would have the highest corporate tax rate in the free world, under Obama’s plans.

At the other end of the scale, the economic impact of personal income taxes dwindles as income levels decline, to the point where “there is no significant relationship between long-term growth and taxes on the lowest level of income.” In other words, Obama-style tax subsidies for the lowest income groups, touted as fantastically effective economic stimulus under Democrat ideology, in fact have virtually no large-scale economic benefit. “Trickle-up economics” is as useless as a glance at the past few years of unemployment headlines would suggest.

It’s also worth keeping in mind that corporate taxes in the United States are not simple, or efficiently administered. They’re riddled with exemptions, loopholes, and penalties, many of which were installed for political and ideological reasons, rather than any kind of economic logic. The effective rates paid by most businesses are lower than the very high nominal rates. That sounds as if it would mitigate the damage from high corporate taxes… except it piles huge compliance costs on corporations, and leaves them terrified of making a wrong move that would cost them access to those crucial deductions.

Business entities are also more likely to respond to lower taxes in a planned and productive way. Individuals collect their meager $40 from Obama’s Social Security raid, quickly become accustomed to the extra money in each paycheck, and make very few deliberate changes to long-term behavior. A ten percent reduction in corporate taxes is much more likely to result in long-term planning to reinvest the money gained, coupled with competitive reductions in consumer pricing over time, since corporate taxes are ultimately paid by consumers.

“If lawmakers want to have the biggest impact on boosting long-term economic growth in the U.S.,” the Tax Foundation advises, “they should turn their attention to cutting tax rates on corporate and individual income.” Growth is not what Barack Obama is about, and it never will be.